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Difference between Financial Crisis and Economic Crisis
Various challenges might have varying effects on a country's economic operations. There are a lot of people invested in a country's economic prosperity, and these things hurt them. The terms "financial crisis" and "economic crisis" are used to explain the state of an economy or a country. While both refer to economic issues, there is a notable difference between the causes of recession and the impact of the recession on a country's economy.
What is a Financial Crisis?
A financial crisis occurs when the value of a country's financial assets drops dramatically. As a result, asset values drop, consumers can't meet their debt commitments, and banks face liquidity crises, all of which wreak havoc on the economy. This causes problems for an economy as a result of;
Activities are carried out by banks and other financial institutions in the capacity of financial intermediaries.
Variations in the amounts of prices for assets and the national credit market
Intervention on the part of the government in the recapitalization
Liquidity efforts from all parties
If a financial crisis is taking place in a country, banks, and other financial institutions are a major reason why. After a panic, these factors generate financial disturbances that prompt investors to either sell off their holdings or withdraw their money. Some additional factors that might trigger a financial crisis in an economy include a decline in the stock market, a crisis in a country's currency, a default by a sovereign nation, and the bursting of a financial bubble, such as in the real estate market.
Even if a financial crisis initially only affects a small number of banks or a narrow slice of the economy, it might quickly spiral out of control and damage the entire region, the nation, and even the world.
What is an Economic Crisis?
An economic downturn occurs when a country has a financial crisis. Liquidity dries up, unemployment rises, output drops, GDP drops, and the economy becomes more volatile due to deflation or inflation. It is possible for multiple economic crises, such as the Great Depression and the Great Recession, to occur at the same time.
The following are some possible triggers for an economic crisis −
Mismanagement of scale on an enormous scale
Assets held by financial entities that do not match their liabilities
A sharp drop in value has been seen in stocks and securities recently.
Economic crises have detrimental effects on society at large, banking institutions, and the economy as a whole. The standard of living in a country suffers when the unemployment rate rises.
Differences − Financial Crisis and Economic Crisis
The following table highlights how a Financial Crisis is different from an Economic Crisis −
| Characteristics | Financial Crisis | Economic Crisis |
|---|---|---|
Definition |
An economic crisis occurs when a country's economic activity suddenly drops as a direct result of a financial crisis, while a financial crisis occurs when asset prices in an economy fall sharply. |
As the financial crisis continues, it is having a direct impact on the banking and financial sectors. However, a crisis has an immediate and widespread effect on all aspects of a country's economy, this is called an economic crisis. |
Effects |
The prolonged financial crisis is having serious consequences for the banking and financial sectors. However, a crisis in the economy has an immediate and widespread effect on all aspects of economic life. |
An economic disaster can be caused by a number of factors, including but not limited to high interest rates, a drop in consumer expenditure, a high unemployment rate, and a financial crisis. |
Components |
A financial crisis is a specific instance of an economic crisis. |
During and after a major economic crisis, the status of the economy may become more obvious. |
Conclusion
The terms economic crisis and financial crisis are often used synonymously to describe the economic situation of a country. A financial crisis occurs when the value of financial assets in an economy suddenly drops, which has a direct impact on the banking and finance industries.
A national economic crisis occurs when a country's overall economic activity drops precipitously due to a financial crisis. An economic crisis has repercussions for all economic actors in the longrun and provides a more nuanced picture of the state of the economy.
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